Supplier Risks: 5 Key Considerations in Procurement

Supplier risks are defined as the challenges related to supplier concerns. It’s an issue that tackles product, supply logistics, and the like circumstances.

In this article, I will elaborate on the supplier risks. We’ll learn about its key considerations and its impact on procurement. Moreover, I’ll explain what this risk means for your business. 

We’ll cover various supplier risk types. In my time as a procurement manager at Ahold Delhaize, I’ve encountered my share of risks. Luckily for you, I’ll show them here before you encounter them yourselves.

I’ll also provide real-world situations for you to better understand its impact. Hopefully, with our help, we can navigate these risks efficiently. 

What is Supplier Risk?

Supplier risk refers to the challenges or issues that are supplier-attributed. These concerns include supplier performance, financial position, and other pertinent information. 

Supplier risk issues include insolvency, quality control, and compliance failure. It also includes geopolitical issues and even environmental concerns. These are factors that bring major disruptions to the supply chain.

Managing the supplier risk is necessary for maintaining a robust supply chain. Companies handle suppliers and evaluate them based on financial health and reliability. It’s also important to include industry compliance standards and logistics capability.

These factors help companies like yours create contingency plans for these concerns.

Through supplier risk assessment, companies can control supply situations. It helps companies stabilize and improve supply lines. 

Moreover, it’s highly beneficial for supplier relationship management. Supplier risk development plans make companies agile and competitive. It’s a preparation for unexpected supply chain disruptions. 

Why is Supplier Risk Crucial to Know?

Supplier risk and its management are crucial for company supply chain resiliency. A company’s supplier is important in producing and delivering quality goods. Potential disruptions pose a challenge to the company’s continuity. 

Proactive risk management is crucial for this task. It helps reduce production delays and cost increases. Of course, it’s a challenge to meet customer demands while maintaining a stable profit. Moreover, we should also consider the customer’s perspective and your reputation.

Today’s economy calls for a simplification of complex supply chains. Complex frameworks expose businesses to various supply chain risks. It’s a must for companies to navigate along with these tensions. It will help them mitigate concerns such as disasters and market complexity. 

Understanding supplier risk is crucial to create varying informed decisions. Procurement teams must prepare strategies and plans to improve their supplier relationships. It enables them to foster better partnerships and have greater negotiating power. It aligns company goals with partner goals.

Overall, supplier risk management can ease business tensions. It helps them maintain a strong headstart against competitors. Moreover, it reduces financial pressure and protects supply operations. 

Supplier Risk Considerations

Key considerations for supplier risk are crucial. It helps the company manage these concerns better and smarter. We’ll be looking into some of these essential considerations. These can make your supply chain better:

1. Financial Stability

The financial position of a supplier is crucial when establishing a partnership. It helps make the deal easier and more stable. 

A supplier with these challenges may struggle to uphold their side.  It could potentially lead to production delays or even interruptions. Regular financial partnership assessment is crucial for avoiding supplier risks.

In improving financial stability, audits and maintaining finance-related communication is essential. It can help mitigate potential risks by establishing contingency plans. 

Procurement teams must include backup suppliers and even contractual clauses. These additions provide security and stability to potential long-term relationships. Moreover, it can support the growth and continuity of your supply chain.

2. Operationality

A supplier’s operational performance is necessary for an on-time delivery. It also touches on vital activities like quality control and responsiveness. 

These are valuable factors that help maintain the company’s requirements. Sub-optimal performance may lead to potential delays and lower-than-standard products.

Operational performance improvement can be achieved through a clear metrics set-up. Additionally, it’s vital to monitor essential areas. These areas include the delivery period and quality check-up. 

Using SRM systems can be helpful for faster and more efficient tracking. Using these tools and considerations can ensure consistency and continuity.

3. Environmental Considerations

Suppliers from across the global landscape may have different situations. It may be that your company remotely sources from such suppliers. These reasons may lead them to uncertain or unexpected issues. 

You must communicate and collaborate with your team and suppliers to find a way to address this concern. This process is an efficient way to avoid these issues.

It’s also important to have a thorough geographical assessment. This process helps navigate environmental challenges and their potential impacts. Suppliers must maintain collaboration and communication to face such challenges. 

Additionally, disaster recovery plans can enhance supply chains better. Of course, the focus leans toward environmental disruptions affecting the supply chain.

4. Sustainability Practices

Sustainable alignment is crucial to maintaining reputation and environmental stability. It’s for ensuring that your shared environment grows along with your business. 

Of course, key considerations are rooted in ethical considerations and continuity. Incorporating sustainability is a way for companies to avoid supplier risk. It can also strengthen your overall supply chain.

Sustainability practices go hand-in-hand with environmental activities. Embed these sustainable goals by using eco-friendly methods and updated sustainability trends. 

Guide your procurement team through meeting regulatory standards. It’s also crucial to share potential ideas that can further enhance sustainable innovations.

5. Legal Compliance

Suppliers must adhere to legal standards. This consideration generally affects the supply perspective and the way both parties approach. 

Legal compliance encompasses a wide variety of standards. But most importantly, these rules help avoid potential repercussions. 

Improving your legal compliance checklist can help you conduct audits and maintain adherence. It’s vital to verify if your policies match industry standards and even regulations. 

Implement timely training that focuses on relevant law implementations. This way, it’s easier to navigate modern procurement practices. It can also help you adapt other pertinent procurement trends. 

Types of Supplier Risk

In this section, we’ll be discussing various types of supplier risk. It’s crucial to understand each type so you can address it accordingly. Below are each type:

Cybersecurity Risks

This risk type focuses on digital concerns. Modern procurement has an increased reliance on tech and all things digital. More and more processes are becoming technology-based. 

The competitive market also calls for technologically dominant companies. It’s why new risks such as cyber-attacks and data breaches have become more rampant.

For this risk, let’s learn from what happened with Maersk. This multinational shipping company faced a cyber-attack due to NotPetya malware. 

It caused a shutdown that resulted in a huge loss of $300 million. This issue highlights the necessity of implementing procurement security, especially in digital procurement.

Compliance Risks

These risks lean towards upholding regulatory frameworks. Procurement professionals and companies must maintain compliance. It helps improve reputation and security when it comes to product credibility.

Here, the tech company, Huawei, faced compliance issues in the US and UK. It’s because of a controversial concern regarding disputes and security concerns. 

The issue is Huawei allegedly violates the regulatory practices regarding data privacy. Such security concerns are crucial to be addressed. It’s an example of strict adherence to compliance factors.

Supplier Financial Risks

This type of risk refers to your supplier’s financial status. Put simply, if your supply can or cannot pay for their necessities. 

It’s vital to know if they face debt and potential bankruptcy issues. These variables may also affect your potential partnership.

Here, Thomas Cook, a travel company, displayed financial failure’s ripple effect. We can see that many of the company’s suppliers were affected by their bankruptcy. 

Those who are still having a long-term contract with the company are left without payment. This unfortunate circumstance shows the necessity of regular supplier financial assessment.

Event Risks

This risk type focuses on the ‘force majeure’ or ‘natural disasters. Climate concerns, geopolitical issues, and even pandemic-related concerns play a role. Your company must be ready to face these problems by implementing contingency plans.

The 2021 Suez Canal blockage affected IKEA, a major retail giant. The company relies on the world’s vast supply chain for its product delivery. However, the ship Ever Given blocked the canal. This problem caused countless shipments to be stuck for days, IKEA included.

 Eventually, it caused restocking delays affecting Europe and the Middle East. This disruption showed that unexpected events can expose any major company’s vulnerability. 

In this particular event, we highlight IKEA’s challenges. Such a case emphasizes the need for contingency plans, especially for the supply chains. 

CSR and ESG Risks

CSR and ESG are two aspects that work for the social good. It focuses on environmental concerns and sustainability issues. Your company must be able to navigate these issues while ensuring a smooth operation.

For this risk, let’s take a look at what happened with Starbucks. The company faced backlash due to plastic straw usage. 

This problem has gathered the attention of the public. Due to its contribution to environmental pollution, the company listened. 

They pushed that they’ll be eliminating plastic straws by 2020. This example shows how reputational damage can affect companies as large as Starbucks. 

Capacity Risks

This type of risk focuses on a supplier’s issue with logistics. It may be a delay in the delivery schedule or even unexpected delivery issues. 

You must assess a supplier’s delivery capacity. From that point, you can track your supplier’s actions. It will help you check their delivery order stability.

Here, Tesla faced huge capacity risks in their production. It concerns the delays with their model 3 vehicle. Initially, Tesla promised high delivery volumes for their customers.

However, they faced issues with manufacturing automation and supply chain bottlenecks. This problem led them to miss their financial targets. It also left their customers unhappy with their company.

Performance Risks

This risk is a common problem that partners often argue with each other. It’s a risk concerned with the inability to meet the partnership’s expectations. 

Suppliers may fail to meet goals and may become a point of pressure for them and the business partner. This problem can potentially damage your customer’s experience. 

In 2013, Boeing tackled major performance risks with their 787 Dreamliner Planes. These planes faced battery overheating issues. This problem leads to numerous grounded flights and delivery delays. 

It stems from suppliers failing to meet the performance expectations of Boeing. Moreover, it also cost them their reputation and meeting compliance. 

Conclusion

In conclusion, supplier risk is a crucial aspect that the company must understand. This way, you can manage your supplier effectively and maintain your supply chain. 

Knowing each risk holds significant importance in the various aspects of procurement. Each challenge requires a different strategy, which your team must address. 

Doing so helps them strengthen their critical skills and your supplier relationships. Successful supplier risk management begins with understanding the core basics. 

From there, you move toward how these basics affect your procurement. That way, you’ll be better equipped with knowledge that will bring you a competitive edge.